HELOC Tax Deduction Rules in 2026: What's Deductible?

The tax treatment of [Home Equity Line of Credit](/blog/best-heloc-lenders-2026) (HELOC) interest changed dramatically with the Tax Cuts and Jobs Act (TCJA) of 2017, and those rules remain in effect through 2026. Understanding what HELOC interest you can deduct—and what you can't—could save you thousands of dollars or prevent a costly mistake on your tax return.

The Golden Rule: How You Use the Money Determines Deductibility

Since the TCJA took effect, there's one critical rule that determines whether your HELOC interest is tax-deductible: you must use the borrowed funds to buy, build, or substantially improve the home that secures the loan.

This is a fundamental shift from pre-2018 rules, when you could deduct interest on home equity debt regardless of how you used the money—whether for consolidating credit cards, buying a car, or funding a vacation.

What "Substantially Improve" Actually Means

The IRS considers substantial improvements to be those that add value to your home, prolong its useful life, or adapt it to new uses. Examples include:

Kitchen or bathroom remodels that involve replacing cabinets, countertops, appliances, or fixtures
Room additions like adding a bedroom, bathroom, or sunroom
Structural improvements such as replacing the roof, HVAC system, or windows
Accessibility modifications like adding ramps or widening doorways
Energy efficiency upgrades including solar panels or whole-home insulation

What doesn't qualify as substantial improvement:

Routine repairs and maintenance like fixing a leaky faucet or painting walls
Furniture and decorations even if they're permanently installed
Swimming pools and landscaping (generally not considered substantial improvements by the IRS)
Debt consolidation for credit cards or other personal loans
Education expenses or college tuition
Business investments or starting a company
Purchasing a second property (unless it secures the HELOC)

Documentation Requirements You Can't Ignore

The burden of proof falls on you, the taxpayer. If you're audited, you'll need to demonstrate that your HELOC funds went toward qualified home improvements.

Essential Records to Keep

Contractor invoices and receipts: Keep detailed invoices showing the scope of work, materials used, labor costs, and dates of service. These should clearly describe the improvement work, not just "services rendered."

Bank statements showing fund flow: Maintain records that trace the money from your HELOC disbursement to the contractor or home improvement store. This creates a clear paper trail.

Before and after photos: While not required by the IRS, photographs documenting the improvement work can support your case if questioned.

Building permits: For major renovations, obtain and keep copies of all building permits. These provide official documentation of the work performed.

Appraisals or assessments: If you had your home appraised before and after improvements, these documents can demonstrate added value.

The 60-Day Documentation Window

Some tax professionals recommend documenting your intended use of HELOC funds within 60 days of disbursement. While the IRS doesn't explicitly require this timeline, it strengthens your position by showing clear intent.

Create a simple memo or spreadsheet at the time of borrowing that lists:

HELOC disbursement date and amount
Intended improvement projects
Estimated costs for each project
Expected completion dates

Deduction Limits and Thresholds

Even when your HELOC interest qualifies for deduction, there are caps on how much you can deduct.

The $750,000 Combined Debt Limit

For mortgages and HELOCs taken out after December 15, 2017, you can deduct interest on up to $750,000 of combined qualified residence loans ($375,000 if married filing separately).

This limit includes your primary mortgage plus your HELOC. For example:

Primary mortgage balance: $600,000
HELOC balance: $100,000
Total qualifying debt: $700,000 (under the limit)

If your combined debt exceeds $750,000, you'll need to calculate the deductible portion proportionally.

The Grandfathered $1 Million Limit

If you took out your HELOC before December 16, 2017, you're grandfathered into the old $1 million limit ($500,000 if married filing separately). However, you still must use the funds for home improvements to deduct the interest under current rules.

Refinancing a grandfathered loan doesn't necessarily lose you this benefit, but the rules are complex. The grandfathered status continues only if:

The refinanced amount doesn't exceed the original loan amount
The new loan is secured by the same property
You complete the refinance before the original loan would have been paid off

Itemizing vs. Standard Deduction: The Critical Decision

To claim any [HELOC interest deduction](/blog/heloc-for-rental-property-renovation), you must itemize your deductions on Schedule A. For 2026, the standard deduction is approximately:

$15,000 for single filers
$30,000 for married filing jointly
$22,500 for head of household

(Note: These are projected amounts; confirm current year figures)

Your total itemized deductions—including mortgage interest, HELOC interest, state and local taxes (up to $10,000), and charitable contributions—must exceed the standard deduction for itemizing to make financial sense.

The Math That Matters

Let's say you're married filing jointly:

Mortgage interest: $18,000
HELOC interest (qualified): $3,500
Property taxes: $7,000
Charitable donations: $2,000
Total itemized deductions: $30,500

If the standard deduction is $30,000, itemizing saves you money only on the additional $500. At a 24% tax bracket, that's just $120 in tax savings.

Many homeowners find that with the increased standard deduction and the $10,000 cap on state and local tax (SALT) deductions, itemizing no longer benefits them—even with substantial HELOC interest.

Special Situations and Edge Cases

[Using HELOC Funds](/blog/heloc-draw-period-explained) for a Second Home

You can deduct HELOC interest on improvements to a second home only if the HELOC is secured by that second home. You cannot take out a HELOC on your primary residence and use it to improve a vacation home while claiming the deduction.

Mixed-Use HELOC Funds

What if you borrowed $75,000 on your HELOC: $50,000 for a kitchen remodel and $25,000 to pay off student loans?

You can deduct interest only on the portion used for qualified home improvements. You'll need to track the $50,000 separately and calculate the proportional interest attributable to that amount.

If your HELOC charges 7% annual interest:

Total interest paid: $5,250
Deductible portion: ($50,000 / $75,000) × $5,250 = $3,500

Home Office Deductions

If you use part of your home exclusively for business and claim the home office deduction, HELOC interest for improvements to that space might be partially deductible as a business expense rather than a personal itemized deduction. Consult a tax professional for this complex scenario.

State Tax Considerations

While federal rules changed dramatically in 2018, state tax laws vary. Some states:

Conform to federal rules: Most states follow federal guidelines for HELOC interest deductions
Have their own rules: A few states maintained pre-TCJA deduction rules
Don't have [state income tax](/blog/states-with-no-income-tax-investing): Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming

Check your state's specific rules, especially if you're in California, New York, or New Jersey, which have complex state tax codes.

Common Mistakes That Trigger Audits

Deducting Interest on Non-Qualifying Uses

The most common error is deducting HELOC interest when funds were used for debt consolidation, vehicles, or other non-qualifying purposes. The IRS has sophisticated matching systems that can flag returns claiming home equity interest deductions inconsistent with your financial profile.

Poor or No Documentation

Claiming the deduction without maintaining proper records is a recipe for trouble. In an audit, "I know we used it for the bathroom remodel" without supporting documentation won't hold up.

Exceeding Debt Limits

Failing to calculate the combined debt limit properly can result in over-deducting interest. This often happens when homeowners don't realize the $750,000 limit includes their primary mortgage.

Claiming Repairs as Improvements

There's a fine line between repairs (not deductible) and improvements (deductible). Replacing three broken shingles is a repair; replacing the entire roof is an improvement. When in doubt, consult a tax professional.

Practical Steps for 2026 Tax Filing

Step 1: Review Your HELOC Usage

Before filing, review every disbursement from your HELOC during 2025. Categorize each use as:

Qualified home improvement: Deductible
Non-qualified use: Not deductible
Mixed use: Requires proportional calculation

Step 2: Gather Documentation

Compile all invoices, receipts, canceled checks, and bank statements showing the flow of funds from HELOC to qualified improvements.

Step 3: Calculate Qualified Interest

Your lender will send Form 1098 showing total interest paid. If you used HELOC funds for both qualified and non-qualified purposes, calculate the deductible portion based on the ratio of qualified funds to total borrowed funds.

Step 4: Determine If Itemizing Makes Sense

Add up all potential itemized deductions. If they don't exceed your standard deduction, you won't benefit from the HELOC interest deduction anyway.

Step 5: Complete Schedule A

Report qualified HELOC interest on Schedule A, Line 8a (home mortgage interest). Keep all documentation with your tax records for at least seven years.

Planning Ahead: Maximizing Your Deduction

Time Your Improvements Strategically

If you're planning major improvements, consider timing them to maximize deductibility. Bunching improvements into a single tax year when you have other large itemized deductions can push you over the standard deduction threshold.

Keep Business and Personal Separate

Never commingle HELOC funds intended for home improvements with other purposes. Open a separate checking account solely for improvement projects if needed to maintain clear records.

Consult Before Borrowing

Before taking out a HELOC, discuss your plans with a tax professional. They can help you structure the borrowing and spending to maximize potential deductions while ensuring compliance.

The Bottom Line

HELOC interest deductions in 2026 are far more restrictive than they were before 2018. The key takeaways:

Only home improvements count: Funds must be used to buy, build, or substantially improve your home
Documentation is everything: Maintain meticulous records of how you spent the money
Debt limits apply: Combined mortgage and HELOC debt over $750,000 reduces your deduction
Itemizing is required: You must itemize to claim any benefit
State rules may differ: Check your state's specific requirements

For many homeowners, the increased standard deduction means HELOC interest deductions provide little or no tax benefit. However, if you're doing significant home improvements and already itemizing, understanding these rules can save you thousands.

When in doubt, consult a qualified tax professional or CPA familiar with your specific situation. Tax laws are complex, and proper guidance is worth the investment.

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Heloc Tax Deduction Rules 2026

Key Takeaways